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The US dollar is posting modest gains against most of the
major and emerging market currencies to start what is likely to
be among the most important weeks here in the first quarter, with
numerous central banks meeting, first tier economic data and the
deadline for the Private Sector Involvement (PSI) in
Greece. The yen is bucking the generalization,
recovering from its pre-weekend losses helped by cross rate
gains.

Global equity markets are lower, with the MSCI
Asia Pacific Index losing almost 1%, with Chinese Premier Wen
cutting China’s GDP target this year to 7.5% and the sub-50
reading on the official service sector PMI
(48.4 from 52.9) taking a toll on regional bourses and sending
the yuan to a four week low against the greenback. European
equities have followed suit.

A downward revision from the flash service PMI (48.8 from 49.4
flash reading and 50.4 in Jan) and concerns of light
participation in the PSI weighed on prices. The Dow Jones Stoxx
600 is off nearly 2/3 of a percent near midday in London, with
basic materials and the financial sector the heaviest sectors
with only health care advancing.

Given the disappointing data and equity losses, and pullback in
gold and oil prices, one would have expected a greater reaction
in the debt markets than the largely flat reading from the core
and modest losses in the European periphery.

There are three main highlights of the week ahead outside
of the plethora of central banks that meet, for which we do not
expect any change in the G10, but do expect Brazil to deliver
another 50 bp cut in the Selic rate on Thursday.

First, the PSI “invitation” to participate in the bond
swap ends 3 pm EST Thursday. Given the complications of
the process, it is expected that many investors will have to
really decide by Tuesday. Press reports indicate a slow start and
soft participation. Investors seem more cognizant that the risks
of triggering the retro-fitted collective action clauses are
increased. Recall that 75% must participate to avoid this, which
would most likely been seen as a credit event in the sense of
triggering credit default swaps. Less than 66% participation and
even the CACs are invalid, which would seem to scrap the entire
Greek 2.0 package.

The second LTRO is thought to have helped strengthen the
firewall, protecting Spain and Italy and the sharp drop in yields
in recent weeks have provides some cushion to absorb the shock,
but there remains great uncertainty.

Second, US employment report at the end of the week is
expected to show the third consecutive month of more than 200k
job growth. The unemployment rate has fallen for five
consecutive months, but the fact that this is not just a function
of job growth, but also large numbers of people leaving the work
force has tended to take the gloss off the numbers.

However, this has come under greater scrutiny and it appears
there is a structural shift taking place. One study found that
only about a third of those leaving are classified as wanting a
job. Only about 1 in 7 of those leaving the job market is in the
25-54 age group, which is regarded as the prime employment age.
The bulk of those who are leaving the job market and do not want
a job are in the 55+ age group. In turn this would
suggest the output gap may not be as great as those viewing the
labor market developments in purely cyclical terms
claim. The Mexican peso and the Canadian dollar have
tended to react positively to strong US data.

Third, at the end of the week China reports it monthly
series that includes, consumer and producer prices, industrial
production, retail sales and investment. It is important
that these reports are for the month of February and are expected
to be cleaner reads after the Lunar New Year distorted the
January series. Nevertheless, we expect the data to confirm a
gradual slowing of the economy, while more moderate food prices
can see the CPI rate fall back under 4% from 4.5% in January. We
look for the gradual easing of monetary policy. Meanwhile news
that China plans to increase its defense spending by 11.2%, has
grabbed media attention, though the growth rate is somewhat
smaller than last year.